The Effect of Terrorism on Kenyans Security Market (the Case of the Nairobi Securities Exchange)

Abstract

The stock market plays a critical role in the national economy since it facilitates fundraising activities, trade, investment and economic growth and development. An understanding of all the factors that affect its performance is crucial. Socio-political events such as terrorism have been noted to disrupt the flow of financial capital between nations and affect incomes, company profits and stock prices. Terrorism has become a fairly recent global phenomenon which almost every society finds itself exposed to from time to time, hence the need to understand its effect on the stock market. Terrorism is of particular interest to the government, investors and listed companies at the Nairobi Securities Exchange (NSE). The objective of this research study was to establish the effect of terrorism on the Nairobi Securities Exchange (NSE). The three main terrorist events studied were the 1998 bombing of the US embassy in Nairobi, the 2002 bombing of Paradise hotel in Kikambala and the 2011 kidnapping of tourists and aid workers. This study utilized event study methodology to examine the effect of terrorism and military attacks on the Kenyan stock market and relied heavily on secondary data obtained from the NSE. The event study analysed the data using excel and Statistical Package for Social Sciences (SPSS) and results presented in tables, figures and appendices. The study suggests that further research studies be conducted to establish the effect of terrorism on other sectors of the economy such as financial institutions as well as the insurance and re-insurance sector. The study determined that there are significant short term negative stock returns around the terrorist event dates as evidenced by the decline in the NSE 20 share index, abnormal returns (AR) and the cumulative abnormal returns (CAR) around the terrorist event dates. Therefore, terrorism has a negative effect on Kenya’s stock market